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2a_Competition - Power of Rivalry Economics of Competition...

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Nile W. Hatch © 2002 – 2008 ManEc 387 Economics of Strategy Power of Rivalry Economics of Competition and Profits 1
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Nile Hatch © 1996 – 2008 Exploring Industry Structure Threat of Potential Entrants Bargaining Power of Suppliers Rivalry between Competitors 2 Customer Power & Preferences Threat of Substitutes 2
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Nile Hatch © 1996 – 2008 The Threat of Rivalry Rivalry is the threat that firms will compete away their profit margins. This occurs through Price competition – Frequent introduction of new products – Intense advertising campaigns – Fast competitive response 3
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Nile Hatch © 1996 – 2008 Sources of Increasing Rivalry Large number of competing firms of similar size ( unconcentrated ) Lack of product differentiation Slow industry growth Fixed costs are a significant fraction of total costs Productive capacity added in large increments Exit barriers 4
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Nile Hatch © 1996 – 2008 Market Structure and Performance The greatest threat to performance is for rivals to dissipate economic profits through price competition. Different market structures represent different levels of expected price competition: Market Structure Intensity of Price Competition Perfect Competition Fierce Monopolistic Competition May be fierce or light depending on the degree of differentiation Oligopoly May be fierce or light depending on the degree of interfirm rivalry Monopoly Light unless threatened by entry 5
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